On Thursday morning, the Matthews, N.C.-based discount retailer said its board , while reaffirming its recommendation to support an $8.5 billion merger agreement with Chesapeake, Va.-based Dollar Tree Inc. (Nasdaq: DLTR). That deal would combine the two discount store chains, both of which have dozens of locations in the Milwaukee area. Dollar General is a smaller player here, with about a dozen and a half stores in the Milwaukee area.

That cash-and-stock transaction is valued at $74.50 per share.

Family Dollar (NYSE: FDO) says its agreement with Dollar Tree allowed it to negotiate or even terminate its merger agreement to enter into a new agreement with a competing bidder. It contained a $305 million break up fee.

The board must determine that competing bidder will lead to a superior proposal that is likely to be “completed on the terms proposed.”

Dollar General (NYSE: DG) made an all-cash offer of $78.50 per share. It also agreed to divest 700 stores to address regulatory requirements.

“The Family Dollar Board, after consultation with its financial and legal advisers who have conducted an extensive antitrust analysis, determined that the Dollar General proposal fails to satisfy this requirement,” a statement from Family Dollar reads.

Family Dollar CEO Howard Levine says Family Dollar’s board has been analyzing antitrust issues tied to a potential combination with Dollar General since the beginning of the year.

“Our Board reviewed, with our advisers, all aspects of Dollar General’s proposal and unanimously concluded that it is not reasonably likely to be completed on the terms proposed,” Levine said in a statement.

Family Dollar’s board has sought to maximize shareholder value while considering the certainty of closing a transaction, says Ed Garden, a co-founder and partner at Trian Fund Management. Trian is a larger shareholder of Family Dollar.

He notes that Dollar General has not put forth a proposal that eliminates regulatory risk for Family Dollar shareholders.

“Given the significant antitrust issues involved with Dollar General’s proposal, we will not jeopardize the Dollar Tree deal for a transaction with Dollar General that has a high likelihood of not closing due to antitrust considerations,” Garden says.

“I would also like to note that Dollar General’s letter, sent late last night, contained blatant mischaracterizations and did nothing to address the antitrust issues in Dollar General’s proposal,” Levine says.

He notes that prior to signing its merger agreement with Dollar Tree, Family Dollar engaged Dollar General a number of times. Dollar General declined to schedule a discussion on anti-trust issues in June, Levine says.

On June 19, Dollar General said it was not interested in pursuing strategic action, he adds.

Family Dollar says it was bound by a non-disclosure agreement with Dollar Tree, preventing it from disclosing those discussions.